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Gold sales - The reasoning behind Switzerland's policy decision.
The classic question has to be asked again, what is the price of gold? If we answer $xxx, then we have to ask the next question, what is the price of a $?

Is the $ so reliable a store of value that it can be used as a measure of gold? This questions the very foundation of the paper currency system. Can one trust the $ or even the international monetary system? It's all a question of degree.

• The U.S. holds mainly gold in its reserves, because it is the issuer of the globe's reserve currency. This does imply that it is completely dependent on its own currency, the $, in the global economy. As the foundation of the world's monetary system, should the currency lose the confidence of its own or other nation's citizens, the international money and trade relations across the world will be damaged severely. It is thought that this process is well under way.

• The Eurozone community's Central Bank drew off 15% of its reserves in gold from its members. This does not mean they intend to only hold 15% of its reserves in gold, nor does it imply that there is a rigid exchange rate between gold & the €. But the question of how to measure 15 of reserves is raised. From the beginning of the Central Bank Gold Agreement the E.C.B. decided to sell a fixed tonnage of 235 tonnes of these reserves for paper currencies, ostensibly to keep this rough proportion in their reserves. The E.C.B. is fully aware of the dangers of measuring gold in the $ and in the € for that matter, but for the sound functioning of the paper currency world it is crucial that gold be subject to measurements in paper currency terms and not the other way around. With the higher prices this is around 25% of the E.C.B. reserves, perhaps a level they prefer?

• Germany, who gained the option to sell up to 500 tonnes of its gold, has not done so, citing that "gold is a useful counter to the swings in the $". Of course a doubling in the price of gold since making this decision is paying off handsomely. We commend the pragmatism of the Germans, for reserves are there for a rainy day and are not a pension fund scheme to make it grow profitably. Certainly this can be a secondary objective but never take over first place. The reserves have to be credible in times of distress and acceptable to all ones trading partners. Germany is aware that the times are a changing and are keeping their eye on the future of the global economic and monetary order and guarding against it.

• Italy has no plans to sell any gold, which is unsurprising given the very poor history of the Italian Lira. They too have seen several currencies come and go in the last one hundred years, so they have few illusions about the joys of compound interest, after all adding noughts to a currency doesn't make them more valuable, it's the buying power that counts. So, will the $ today, with interest added over the next decade or two, be worth more than today's equivalent in gold in a decade or two?

• The Swiss Franc has always been one of the most stable of the globe's currencies within one of the most stable and constant of economies. In times of global war or uncertainty, this peaceful anti-war country becomes itself a 'safe-haven' for foreigner's savings. So it is almost a source of safe money and financial security in itself. So their concept of a rainy day contains far less moisture than other countries. It is therefore financially more secure and less dependent on its reserves than other countries whilst being small enough to adjust if reserve holdings within the foreign exchange markets capacities at present. With the mix of gold and currencies in their portfolio, their character being taken into account, you can be sure they have covered their backs on the risk front and stand to gain either way the cookie crumbles. So it is of little account that they sell some more gold. We see it as a gesture of support for the paper currency system, a gesture they see as protecting their overall reserves portfolio.

So why sell gold, or more pertinently, why sell a little gold and retain sufficient for bad times? It is to ensure the retention of value in the overall portfolio; it is not the getting rid of the gold content therein.

Clearly, Switzerland with its constantly sound position as bankers to the wealthy of Europe and its dependence on the banking industry, has a vested interest in a mix of global paper currencies more so than those nations that have an unsound Balance of Payments, smaller reserves and face greater economic risks in the global economy [Other countries with current account deficits include Australia, New Zealand, Britain, France, Italy, Greece, Spain, Czech Republic, Poland, India, Pakistan, Colombia, Mexico, Hungary, Turkey, South Africa and others].

The big question is will gold have a greater real value in times of distress than yield earning national currencies? In the last world war, what value did the Deutschmark or the U.S.$ have internationally [remember forgery is one of the acceptable weapons of war]? And what value did gold have? - No contest.

With economic power shifting Eastwards and the Asian nations growing away from their dependence on the U.S. economy, inevitably reserve currency dependence such as we are used to with the $, is changing, is fragmenting with other currencies coming onto the scene and with national interests clashing and exerting pressure on the different important global currencies. Should these pressures grow beyond a certain almost indefinable point, then paper currencies will not garner the same level of confidence as they do now, and the unquestionable international reliability of gold as a measure of value will ascend above paper money.

Prime Minister Brown of the U.K. went the way Switzerland is, again, going to go in 1998, looking for a more profitable content [?] to the U.K.'s gold and foreign exchange reserves and paid a heavy price that is growing as the gold price rises. Did he act for political reasons in support of the € and the more controllable paper currency system? We believe Switzerland may be following the same line of reasoning as Brown did. After all, if we measured the proceeds achieved from the last sale and the total value of those plus the interest thereon, what would the shortfall against today's value of that gold?

So the mix of foreign exchange and gold reserves is essentially a gamble on the future.

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